Reverse Auctions: Perhaps The Easiest & Most Impactful Way of Improving Organisational Economics?

TLDR: Reverse auctions are often misunderstood, but are a proven approach to unlocking significant hidden value and can even step change an organisations economics if managed at scale. To succeed: quantify the potential, plan continuous programs, use appropriate auction types, embed auctions into regular operations, and maintain ethical decision-making. This approach can drive efficiency and cost savings fast.

Introduction 

In a recent post, we lightly touched on the misconceptions surrounding reverse auctions and highlighted their potential for transforming an organisation's economics quickly (see the original post here), we received some great questions and I promised to respond with a short follow-up article that aims to provide some actionable insights on this fascinating but often misunderstood procurement strategy specifically:

• When are auctions appropriate?

• How to maximise return/minimise risk?

• How to embed auctions in your business operations?

• How to ensure your reputation is protected?

As someone who has managed and supervised hundreds of auction events over the last 20 years, (including the first ever events conducted in the UK), I can attest that they may not be suitable for all procurement projects, but can be powerful in unlocking value in more cases than typically considered, I have also been surprised how little they have been adopted in the Middle East despite a strong culture and heritage of bargaining. However, with an open mind and a willingness to get started, you will see they can be an extremely powerful negotiation tool to unlock hidden value. Here are some tips to help set you up for success… 

1.First principles 

Let’s start with the big picture, as I briefly mentioned in the last post, removing cost has a big impact on an a typical organisations economics, this is because much of the saving falls straight to the bottom line improving profitability at a disproportionate rate when compared the same value added to the top line (often as high as 5x), this multiplier dynamic is further increased when the cost is removed permanently and improvements to earnings get reflected in the company valuation, for example the S&P 500 prices earnings at an average >21x (Average PE Ratio – Source: Nasdaq Data Link April 2023) so the economic impact can stretch beyond simple savings to dramatically improving company economic profitability, valuation and share price. So how can we achieve this?

2.Plan a programme, not just a one-off event 

For maximum impact consider auctions as a continuous programme rather than individual events. This approach highlights total value potential and motivates management and their teams to realise it. Here are some tips on building a successful programme:

Change your mindset: Aim to auction all projects, pushing yourself to be more creative and run more events (not all can or should be auctioned, but a healthy challenge is good practice).

Identify all upcoming procurements for the next 6-18 months, their value, contract length, forecast growth rate and terms.

Analyse each project against five key questions:

1. Is spend sufficient to motivate competitive bidding?

2. Are supplier margins sufficient for both a saving and a return on investment?

3. Can we have a minimum of four motivated suppliers you'd be willing to work with? (more is much better – there is a direct correlation between number of bidders and a successful outcome)

4. Is there effective comparability between suppliers' offerings?

5. Are there favourable current market dynamics and supply?

Rate projects broadly as Red, Amber, or Green based on these 5 key questions/criteria:

Green: Good fit, low-risk, high-priority events

Red: Poor fit, high-risk event that 'may' not recoup costs, typically these will not be auctioned

Amber: Not a perfect fit, but typically very worthwhile as a basket of events

Next, challenge yourself by asking can we pro-actively re-engineer any Reds/Ambers to make them Ambers/Greens? (e.g., extending the contract term, factoring in growth rates, normalising units of measure, improving comparability etc. etc.)

Schedule events by priority and due dates, starting with Greens and Ambers, but start with those most likely to be successful first and generate excitement and forward momentum.

Identify the value potential of the programme, your auction provider may be able to help here with guidance on average savings ranges in these categories.

Manage the RFX/Tender process as usual but ensure you focus on maximising competition for auction events, and not shortlisting beyond those you would not work with, this mistake can dramatically reduce bidding/savings in an auction event.

Track savings and ROI, analyse outcomes, and continually improve the plan.

3. Horses for Courses 

There are multiple types of events, each with various configurations that can either drive or hamper success if used incorrectly. A good auction service provider can help you optimise events, but here are some quick tips:

• Use the most appropriate auction type for each procurement (e.g., an English reverse auction is good for commodities, but unless weighting is set doesn’t factor in non-price value attributes, a Japanese auction is good for weak competition, or a Dutch auction for a large volume spread across multiple bidders) etc. etc..

• Structure for the dynamics of each individual event, avoiding a one-size-fits-all approach (e.g., show the leading bid if starting prices are close, or only show the rank if they are not).

4. Embed the Capability Into 'Business as Usual' 

For maximum and lasting impact you need to make auctions a permanent way of working:

• Include them in management's agenda, embed them into your processes and question why if any procurement projects do not including an auction phase, it may not be appropriate, but again the healthy challenge drives adoption and value.

• Train procurement teams to use auctions regularly.

• Reserve the right to run auction phases in all RFX documents.

• Encourage high-potential and influential team members to adopt auctions first, publicly highlight success and never punish occasional events that are unsuccessful, (the majority of successful events will typically more than compensate).

• Celebrate and reward success, experimentation and learning.

5. Be Ethical In Your Decisions 

Historically, some poor practice from buyers has damaged the reputation of auctions. Protect your organisations reputation and the suppliers willingness to participate...

• Don't forget suppliers; invest in pre/during/post event support, training, practice events, FAQs etc. 

• Not 'fixing' event outcomes: suppliers need to trust in transparency and fairness.

• Not inviting suppliers to live events unless you would be willing to work with them should they win.

• The winner gets the contract. Avoid any post event further evaluation that changes the outcome and undermines the integrity of the process/event.

Conclusion 

While auctions may not be appropriate for all categories and sourcing activities, they are more successful in various scenarios than procurement professionals in the Middle East typically consider. 

In the current environment of high inflation coupled with rising interest rates, cash flow and profitability are more important than ever, if you have traditionally been reluctant to embrace this important technology, maybe is now is time to reconsider. 

It may seem like there is a lot to know, but the great news is a good auction provider can help set you up for success. They can manage events on your behalf, or train your teams effectively for full self-service events (or a hybrid of both), ensuring that reverse auction programmes become an integral part of your procurement strategy. 

By adopting these practices and fostering a culture of process innovation and continuous improvement, you can harness the power of reverse auctions to drive efficiency and cost savings. With the right approach, reverse auctions can become the easiest and most impactful way of step-changing your organisation's economics. The tips in this post can help you approach them more strategically, unlock hidden value at scale and propel your company (and maybe your career) forward.

When you're looking to streamline your procurement processes and achieve cost savings, our proven procure-tech solutions can help. Whether you need to negotiate better with a programme of auctions, step change your sourcing, manage your supplier relationships more effectively, or gain better visibility into your spend, we've got you covered. We would love to connect and discuss how our solutions can benefit your business - please find our contact details below for a free, no-obligation dialogue.

About Dan Dan is a co-founder at TechConnectME, he has over 20 years experience in the procurement and technology space, including leadership roles in some of the top tier technology providers. Dan has also worked across the Middle East for 15+ years and is an MBA with further executive education in Digital Strategy (MIT), FinTech (Harvard), Executive Leadership (Oxford) and more. You can catch Dan on his LinkedIn at: https://www.linkedin.com/in/dan-quinn-2604951 or his email: Dan.Quinn@techconnectme.com.

About TechConnectME TechConnect Middle East is a procurement technology and professional services advisory firm based in the United Arab Emirates, we help our clients solve problems, improve business outcomes, and unlock hidden value. For a free no obligation conversation on how we could help your business you can contact us at info@techconnectme.com or https://techconnectme.com.